ACT’s alternative budget

As of now I’ve only seen one alternative budget come out prior to Thursday’s Budget – the ACT party’s one (Stuff,NBR).  Good on them for releasing an alternative budget, I like to see that sort of thing.

However, I have to admit I was a little more than ‘very disappointed’ with the quality of the content.  If your view of the ACT party is fragile, I would suggest not reading this post.  Anyway, here we go.

Here is the core of what was put in the alternative budget:

  1. Sell assets to pay down $40bn of debt (note, asset values are actually well below this – and no matter what this it implies no change in the real net asset position of government).
  2. Dump tourism, pacific island affairs, and woman’s affairs and “other spending”:  $4bn cut (if you go into the details, I am not so sure that society would view all those things as wasteful …).
  3. Raise super age to 67
  4. Cut top tax rate (and corporate rate) to 24%.
  5. Increase abatement rates on WFF for those earning about $48,000

The super age comment is fair enough, and a right leaning party should indeed be making the case for fewer transfers, lower taxes, and smaller government.  However, the actual policy document doesn’t really make any sort of case for why we should change the implied equity-efficiency trade-off in society, and instead relies upon ridiculous made up estimates of what will happen, hiding the things they will cut till later in the document (after calling them wasteful) and generally using platitudes instead of discussing trade-offs.

The Stuff article says that estimated this would lift “economic growth by 5%”.  Either this is a tiny change (0.15% in the level of GDP), or they mean it will lift the level of economic activity by 5% in the long run.  However, this is just a straight typo by stuff – ACT’s actual documents say “increase long-run growth to 5%”.  This is simultaneously different, and even more unlikely – when they say:

Increase long-run economic growth from less than 3% to around 5%

They are talking trash.

Now let’s cut to the chase here.  I would like to take all parties seriously, but this is a frankly ridiculous budget that makes claims that are totally unsubstantiated – anyone with any experience in looking at the data, and the impact of policy, may say that lower tax rates will increase the level of economic activity – but the magnitude implied here indicates that the ACT party has no idea about real economics and is leaning solely on ideology (hence why most of the document is arbitrary catch phrases).

To be blunt, this document might use economics terms but parts of it are frankly economically illiterate.

This is a frankly embarrassing budget, I’m sorry ACT but this sort of thing implies to me – as a complete independent voter with economic expertise – that you have no interest in the welfare of New Zealander’s or actual facts.  This is a pity, as the party was initially set up to focus on realistic trade-offs – just with more “right leaning” value judgments.  There is a role for this sort of party, both in parliament and in public debate – but if this alternative budget represents the ACT party I don’t believe there is any role for them.

ACT, you are using economic language, and loosely pointing at trade-offs we SHOULD be discussing.  But the claims you are making around them are so ridiculous that I fear you are doing more harm than good.  I find this disappointing.

Sidenote:  If I was going to analyse the policies, I’d note that the decision to increase abatement rates for WFF’s will reduce labour supply incentives – and will actually detract from growth in any reasonable specification.

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  • Eric Crampton

    Ok, have had a flip through. You’re harsher than I’d be.

    1. Agree can’t see much net effect of selling off superfund or some other assets to pay down debt. But there’d be gains from lots of privatisations that aren’t the revenue raised; rather, it’s the efficiency gains when resources can be put to higher valued use, when you put in commercial management and so on. That said, we’d likely quickly whittle that away on the power companies as I don’t think a fully private power generation system is here politically stable; we’d wind up with odd regulatory pushes in dry years when people would complain about profits being too high.

    2. They’ve got a lot of cites on growth effects of tax cuts; that lit does have a lot of conflicting results, with some stuff depending on whether you think Sweden means that you can get ok outcomes with highish taxes conditional on having a pretty flexible overall market, or whether Sweden means that more homogenous societies can sustain higher transfer systems with less deadweight cost. I’d need to revisit that lit before calling it.

    3. Agree entirely that increasing WFF abatement increases DWL. But it’s a package deal with reductions in the personal income tax rates for the higher income folks who are on WFF at the same time. So I’m not sure what the net effect would be – would need to see the proposed EMTR schedules. And it’s a temporary thing where they’re looking to phase out WFF entirely in a few years.

    And, while totally with you that economists or any Economist’s Party would need to frame everything in terms of tradeoffs, I don’t think that’s the point of political party alternative budgets. Economists point out tradeoffs so that people have some idea of the efficiency frontier, so they can then use their values to reckon where on that kind of frontier they want to be. Political parties like ACT start from a bounded range of values; given the values, these then are the policy recommendations.

    Here are some ways they were far too moderate:

    1) Save money by abolishing two of the country’s universities. Encourage the remaining ones to increase capacity to take on one university’s worth of students. Fund the remaining Universities with large expansions in international enrollments generated when we grant automatic 5-year work visas to anybody graduating with a decent GPA.

    2) Largely abolish the Tertiary Education Commission.

    3) Instead of getting 0% savings in security intelligence services, aim for 100%.

    4) Marsden seems something where they should go big or go home. As it is, the rent seeking losses are enormous: huge amount of effort put into grant applications almost all of which fail. Expect massive overdissipation here. So either make it big enough that most folks can get reasonable grants, or abolish.

    (I’m sure there’s more, but I’m on the HTPC, and the TV needs other uses)

    • Matt Nolan

      I think you are being a bit too generous. That fact is that they went with a headline stating that their policies would achieve 5% LR growth – that is their main catch phrase for this:

      They are also saying that it has been approved and checked by economists – thereby making it sound like our discipline views 5% LR growth as achievable, and implicitly that the equity costs are acceptable. If the ACT party believes what it is saying, put the slashing of transfers up front to compare with (an actually estimated) growth dividend – the implied cuts in forms of welfare are pretty significant in order to make this budget balance.

      If any other party made claims this wild, and was so blatant about ignoring (or ignorant of) the costs I would be equally harsh – it is that straightforward. The 5% LR growth curve is one of the clearest cases of “economic illiteracy” I’ve could have imagined – there is no way you increase your steady state growth rate to these sorts of levels, especially not as a developed small open economy.

      • Eric Crampton

        Agree that 5% seems a bit of a stretch.

    • Sam Murray

      Just as an aside, although Sweden is more homogeneous than New Zealand, Sweden still has a fairly diverse population. Sweden does not collect statistics on ethnicity, which might lead people to think they are less diverse than they are.

      Sweden has around half a million people of Finnish background who sometimes speak only Finnish. Sweden also has a small indigenous population, the Sami.

      Sweden accepts large numbers of refugees and immigrants. In 2013 Sweden accepted 54,259 asylum seekers and 115,845 immigrants. The Swedish government estimates that 20 percent of the population is either foreign born or born in Sweden to two parents who are foreign born (This number will not include people of Finnish background or other foreign backgrounds who identify as Swedish).

    • Jim Rose

      Eric, with the $20 billion in SOE assets returning $20 million in net terms in 2013, off-loading these risks, that have never returned in portfolio net terms more than the long-term bond rate, seems a good idea.

      A few of these SOEs could not get you change on a dollar as their sale price.

      • Eric Crampton

        Oh, sure. But that isn’t the argument I’m making. I’ll grant that I fully expect that a completely privatised power generation system would be more efficient. Here’s the second-best worry:
        - Power generation funds its longer term capital costs by earning surpluses in dry years when power prices give big rents to hydroelectric generation;
        - People get mad about high power prices in dry years and start listening to ridiculous arguments about how we need to expropriate all those rents;
        - If those rents were earned by a private generator rather than an SOE, it’d be harder for a government to avoid expropriating those rents. Long term: blackouts.

  • Jim Rose

    1. how much the failure of the USA to recover from its great recession is due to taxes and to the expectation of tax rises – Finn Kydland called the latter fiscal sentiment?
    2. How much of the differences in USA and EU income levels are due to taxation?

    • Matt Nolan

      Fair questions – and worth looking at if we wanted to consider the ways in which the level of GDP and size of government are related. I think the US recovery issue is an open question still (the info on firm formation seems really interesting – whatever is behind the change in “dynamism” seems relevant). The gap between US and EU income levels is a hard one – as they differ not only in terms of size of state, but also in terms of labour market regulation (and thereby higher unemployment rates, which as a factor of production lowers output).

      However, they bear less relation to:
      1) What our LR growth rate would be higher (convergence and the actual growth in the frontier are quite different)
      2) Actual key fairness reasons why we may want a smaller government (even if the pie is the same size, letting people choose what they want rather than public provision has value)

      I don’t disagree that lower taxes combined with cuts in government consumption will increase the level of GDP – the lift in allocative efficiency, and fact it directly implies a higher capital stock make it pretty much a given fact, as does the strong empirical evidence.

      I don’t disagree that privatized firms are likely to be better managed. I don’t disagree that weaker RMA standards would see GDP rise. I don’t disagree that dumping the ETS would lead to higher domestic incomes.

      All four of these comes with significant equity costs – but I don’t disagree with the description.

      But LR growth of 5%, doubling the size of the economy in 15 years, “everyone being better off”. These three are complete and total trash. This is ignoring pie in the sky claims like “unemployment will immediately drop to 4%” – lets just say that has little to do with ACT policy here, and is not really something that makes much sense.

      An additional point. It is likely the same people who are pushing these numbers are people who were strongly involved with or behind the reforms in the 1980/90s. If they justify the reforms based on higher counterfactual GDP – well they look like a complete and total failure by now. The truth is a lot of the justification comes from the increase in product diversity, flexibility, and the strong performance of the NZ economy during the global financial crisis. If they don’t have real numbers, they could justify policy on this basis, they could make the case in terms of fairness and the fact that the lit suggests lower tax and consumption do lead to higher GDP (and lower exchange rates).

      Instead they sold the policy on the basis that they would double GDP in 15 years – this is utterly ridiculous, and if a LW party said things that were ridiculous in a similar way us economists would immediately be incredibly harsh on them! I know this, as I’ve written equally harsh post about Green and Labour party policies in the past.

      • Jim Rose

        On distance, Australia and NZ suffer equally from the burden of distance: 10% of GDP.

        Auckland is closer to LA than is Sydney or Melbourne. How do the Australians put bread in the shops I do not know? So far away from LA; huge distances between their cities.

        Distance explains none of the Trans-Tasman income gap, nor why that gap suddenly emerged between 1974 and 1992, nor why NZ TFP dropped by 30% between 1974 and 1980, nor why the Trans-Tasman income gap stopped widening after 1992.

        • Matt Nolan

          On distance I’m not sure Australia is the same distance from its value chain per se. Their export mix is fairly different to ours after all. However, it is an issue for them – and quite why they are one of the richest countries in the world alludes me, this is a very good question to ask.

          WIth regards to the income and productivity gaps – I have a relatively unpopular view. Namely that there are measurement problems. It is hard to look at the fact that the series dropped like a stone in 1984-96 (relative to more gradual declines prior and post this small period), when there was a massive change in both labour market and GDP measurement, and not think that there is something fishy going on.

          Descriptively though, the above piece shows that there are a variety of drivers of what has happened and that the relative productivity gap with Australia has been expanding relatively gradually but persistently. What this means is a hard question. Wrt to taxation, the producitivity commission report did indicate to me that the high level of capital taxation is a contributor – but in a world of increasing specialisation, lack of scale may well come with an increasing penalty!

    • Matt Nolan

      I’d note something else here – just since your questions are important ones and have got me thinking a bit more :)

      1) NZ has measured elasticities for a number of these questions, I was confused ACT didn’t use them.
      2) The literature they leant on was both selective, was often (not all) partial eqm (although the GE work was in a reduced form – making identification an issue, eg dynamic scoring), and had the same flaw – they were applying a linearized policy response to a large policy change. This is always problematic, and is one of my pet peeves for a lot of academic economic work as well ;)

      • Jim Rose

        thanks matt, are these NZ elasticity estimates in any academic journals?

        • Matt Nolan

          A couple of things I’ve been reading over recently was this estimate of LS elasticities given microdata:

          And this estimate of optimal tax:

          Both use frameworks that should be seen as indicative of the impact of incremental change.

          As a sidenote, Treasury has a paper looking at average marginal tax rates for a long period of time, I’m not sure where that has got to!

          While looking for links to these papers, I also ran into a comparable (to the first) study for the US and Europe by Bargain:

          And someones Phd on taxable income elasticities:

          Love the internet :)

          • Jim Rose

            Thanks for these.

            Which would you prefer?

            The results of a tiny, mostly unpublished NZ literature or a very large U.S. published literature fought over by the best and brightest in the profession.

            As an aside, Creedy writes his abstract in your link in a way that infuriates me.

            He says what he is going to do, not what he found.

            Besides wasting my time, Creedy does not follow Stigler’s law of textual exegesis.

            Stigler argued that because even the great and the good are human enough to contradict themselves, and write in vague terms from time to time, so rely on their own summaries of their own work to work out what they think.

            • Matt Nolan

              Both – ultimately, NZ results will differ from US results due to the fact we are a significantly different economy. But given that more specific and detailed research has occurred in the US (with better data sources) it adds value.

              Of course, none of this forgives cheery-picking and misinterpreting results to give a LR growth rate of 5% following policy change – no matter what mixture of NZ and US research we use, such a result falls outside the realms of plausibility.

      • JH

        Hi Matt – I was wondering if you could elaborate a bit on your criticism of the 5% figure for us laypeople. Is the problem that the results from the academic literature are more ambiguous than ACT have implied or that they have applied the findings incorrectly? Is it actually possible to accurately estimate the effects of the policies they advocate (and if so what would be your guess at the overall impact of these policies?) Thanks

        • Matt Nolan


          My impression is that they have confused estimated changes in the level of economic activity and growth in economic activity.

          A change in the structure of the tax system may well lead to more people trading, or trading in more efficient ways. For a period of time this would boost the growth rate as the impact of the change flows through the economy. But in the long-run, the growth in the “frontier” of the economy is unlikely to be as heavily influenced by such policies – this has more to do with growth in population, and the rate of technological progress. This is what makes their comments pretty much ridiculous.

          Even if I was to be charitable, and state that they didn’t mean the long-term, they are implying that our productivity/income difference with a country like Australia is virtually all down to different tax policies and the RMA. This ignores the literature that discusses our distance to market, small scale, and the fact our GDP is measured a tad differently to Aussie. As a result, even the charitable reading leaves me feeling cold.

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